In 1951, Capitol Lake was created from the southern part of Budd Inlet. Since then, there have been a number of fills along the historic shoreline that has reduced the water surface by 124 acres. Today the lake surface is approximately 260 acres in size and has been divided into four basins, called: North, Middle, South, and Percival Cove. The Capitol Lake dam is located in the North Basin and Tumwater Falls is located in the South Basin, south of I-5. Deschutes Parkway bisects the Middle Basin and Percival Cove. The freshwater flow into the lake is provided by the Deschutes River flows into the South Basin and Percival Creek that provides about 10% of the flow discharging into Percival Cove.

The construction of Deschutes Parkway, the creation of the dam, and the creation of the various shoreline parks have significantly reduced the percent of properly functioning conditions, so that only 39% of the shoreline can be considered to be high quality. Tumwater Falls and a natural falls on Percival Creek limited the upstream migration until the installation of fish ladders in 1954. Since 1974, WDFW has been raising yearling Chinook salmon in Percival Cove, a practice they are planning to abandon when an alternative facility has been constructed.

Capitol Lake dam has a five-foot wide fish ladder. With recent restoration of the fish ladder and lake elevation maintained at its summer level of 6.5' NGVD, fish would have year round access to the lake. However, during the winter the lake has been lowered by a foot, is too low for the fish ladder to function properly. Delays in reaching the lake during the winter months may lead to increased predation in Budd Inlet. The lake has also been drained in advance of a flood event from the Deschutes River. This has lead to the premature release of smolts or "zeros" being raised in the lake and yearlings from the Percival Cove net pen.

The Capitol Lake dam also prevents the natural mixing of fresh and saltwater that occurs in estuary, so out migrating smolts and yearlings are forced to immediately transition to by salt water on the other side of the dam. A recent study of dissolved oxygen levels in southern Budd Inlet noted that 'a substantial water quality improvement (an increase of 1-5mg/l dissolved oxygen) is realized in south and central Budd Inlet as a result of returning Capitol Lake to a tidal estuary … (with improvements) observed throughout the Budd Inlet, but particularly in the most water quality impaired areas in East Bay and West Bay' (Brown and Caldwell, 2000)

Sediment accumulation is a significant problem in the lake and has reduced it volume by 25% since 1951. This has resulted in many parts of the lake now being too shallow for boating, and an increase in water temperatures during the summer. Poor water quality has been a long term problem which is now being addressed by a TMDL study by the Washington State Department of Ecology.

Description from the Salmon Habitat Protection and Restoration Plan for Water Resource Inventory Area 13, Deschutes. For more information see the previously stated document or the Salmon Habitat Limiting Factors Final Report Water Resource Inventory Area 13.